New Construction or Old:
Where's the Leverage?

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By Corey B. Chase Principal

Photo for CBC article

According to many indicators, the industrial market is making a strong recovery. Rental rates and sale prices are gradually increasing and we are seeing a significant number of speculative new developments across the Chicago metro area.

In fact, speculative development currently in varying stages of construction totals more than 12 million square feet. Yet as is often the case, the leasing of speculative space lags behind construction activity. As a result, according to recent statistics, less than 10 percent of the 12 million square feet of space being developed is currently leased.

What does that mean for the marketplace?

From the perspective of a tenant representative specialist, development generally is a good thing. It increases the number of opportunities in the market, which often translates into more competitive deals for tenants. It should be noted that in this case we generally are seeing pockets of speculative development activity, not wholesale activity across all markets.

In those markets where we are seeing the greatest volume of spec development, it may mean the difference between one or two availabilities meeting a tenant’s requirements versus as many as three or five options. As suggested, the increase in opportunities usually translates into greater leverage.

One of the big questions for tenants, particularly those who have begun to explore possibilities for when their lease expires, is whether the lack of leasing at this stage portends to getting a better deal now at a spec development versus an existing facility.

Timing, as they say, is everything.

Because of standard underwriting procedures, many owners of buildings currently under construction aren’t likely to be concerned by a general lack of leasing at this juncture in the overall development cycle. This generally means that there isn’t likely to be considerable discounting of rates at this stage because lenders typically factor in a three year lease-up period.

But each individual owner is different. One developer’s “basis” – cost of land, cost of construction, etc. – may be significantly lower than another developer with a project just down the street. That means the flexibility of that owner/developer to do a deal may be vastly different that the next.

The need to do a deal can be a powerful motivator, too. A developer/owner who is getting closer to completion – or who has completed a building but not yet signed any tenants – may have a greater sense of urgency to make a deal. That could result in a tenant’s ability to contract a new construction deal at existing building pricing.

In the end, the ability of a tenant to secure the best deal possible lies in each individual situation – where the tenant is located/wants to locate, the size of the tenant and the competition in the market – both for tenants and for available space.

Good deals always are possible. It is simply a matter of having a complete understanding of the situation.